If you're using the WinMugen version of the fighting engine the problem isn't in the system.def but in the mugen.cfg in the data folder:
scroll down the text until you see this:
;-------------------------------------------------------
; Sound configuration (Windows)
; Note: WavVolume and MidiVolume here are not the same
; as the ones in [Options], but they all affect the volume.
[Sound Win]
;Set the following to 1 to enable sound effects and music.
;Set to 0 to disable.
Sound = 1
...
...
etcetera...
go down a little bit and you'll find this:
;List Winamp-compatible plugins here.
;Specify the filename of the plugin and the list of file types to
;use the plugin for. One plugin per line.
;Example: plugin = plugins/my_plugin.dll, mp3, mp2, mpg
;
;If music is not looping with a particular plugin, you can try an
;optional first argument looptype=1 (seek to zero; may stutter)
;or looptype=2 (reload plugin; slow).
;Example: plugin = looptype=1, plugins/my_plugin.dll, mp3, mp2, mpg
like the file says you could write : (showing an example of mine)
plugin = looptype=2, plugins/in_mad.dll, mp3, mp2, mpg
plugin = looptype=2, plugins/in_mp3.dll, mp3, mp2, mpg
plugin = looptype=2, plugins/in_vorbis.dll, ogg
plugin = looptype=2, plugins/in_adx.dll, adx
(check if you have the plugins and match them to the right code)
In the M.U.G.E.N. 1.0 version there isn't this problem.
This should help you!